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To: Robert Rose (10709 )
From: Robert Rose Wednesday, Jun 23 1999 6:13AM ET
Reply # of 10747
Morning Report
Wed Jun 23
Deja Vu:
CMGI: Lycos Or AltaVista, Which Is Better Value?
By Steve Harmon
Senior Investment Analyst
internet.com
"Where Wall Street Meets The Web"
Two months ago here in Morning Report I outlined why CMGI (NASDAQ:CMGI - news) needed to acquire Lycos. The essence was that CMGI
lacked a platform for distribution that put it at a disadvantage vs. Yahoo, Excite, Lycos and Infoseek. Enter CMGI perhaps buying AltaVista or Lycos.
Of the two, my analysis says CMGI gets more bang for its buck with Lycos. Here's why:
Rumors and news June 22 mention the Web investing company considering acquiring Compaq's (NYSE:CPQ - news) AltaVista. Price talk: as much as
$3 billion, if we toss in Shopping.com and Zip2.com.
If true, that represents a public-market like valuation for the three entities and not a private market valuation. Translation: no arbitrage for CMGI on the
front end of the deal. The buzz also mentions CMGI may be talking to Lycos (NASDAQ:LCOS - news) , fresh out of its failed marriage to USA
Networks. CMGI already owns 18% of LCOS. Translation: it's already 18% there on owning Lycos. There's more.
I ran some numbers on the Web reach of these two against each other and came up with some unique user numbers from Media Metrix for May, 1999.
Tally: Lycos, 30 million monthly users; AltaVista, 11 million. Lycos is #4 in the world in Web users, AltaVista is #10.
Here's the number crunching part: Lycos as of June 22 was valued at $129.69 per unique user. If AltaVista gets a $3 billion marriage proposal it values
its users at $282.14 each, or 118% premium to Lycos users. Is a #10 site worth 118% more than a #4 site? Doubtful.
AltaVista on a Lycos user valuation level would fetch $1.4 billion.
Lycos Vs. AltaVista Valuation Scenarios
Users
Mkt value*
Value/User
Avg. Value/User
Imputed Value
millions
millions
millions
Lycos
29.963
$ 3,886
$ 129.69
$ 214
$ 6,412
AltaVista
10.633
$ 3,000
$ 282.14
$ 214
$ 2,275
valuations by Steve Harmon; user estimates by Media Metrix; * rumored high bid for AltaVista; imputed uses median $214 value per unique user
For comparison, the average value per unique user for the top 10 Web companies globally was $400 and the median was $214.
Let's try another scenario, use the rumored $3 billion total or $282 AltaVista value per unique user on Lycos users and it yields a $8.5 billion valuation
for LCOS. Not that CMGI would pay full retail or a similar level but you see the way logic flows here. Or why AltaVista may not be worth $3 billion in
context.
Other concerns to me in an AltaVista buy are its hobbling along position, it filed to go public in late 1996 and has gone nowhere but into the mire of
Compaq's bureaucracy and lack of Web understanding.
Granted, AltaVista as search is powerful but the days of returning a gazillion search documents are over in my opinion. Bulk search is long dead, mind
over muscle these days. Relevance. Just ask Jeeves.
AltaVista is trying to make itself into a media company 4 years after even the most thick-glasses at Infoseek did so (Infoseek being the quintessential
technology-centric firm in this space).
Lycos in my view is a more developed Internet media property with search, guide, community, commerce, and brands HotBot, Tripod, Angelfire. Why
CMGI would acquire AltaVista and not Lycos is something an actual deal may draw out.
More than the valuation here nobody has discussed why CMGI is so motivated to acquire distribution and assets. The distribution part is something I
covered in Morning Report April 13 (see Morning Report Archives on internet.com's isdex.com).
There's more motivation to me, chiefly CMGI's need for operating assets to put it in compliance with the Investment Act of 1940. This is something
CMGI bumps up against as a major investor in Internet companies that go public.
As I understand it, the gist is that any company who's principal business is investing in public firms (or firms that go public and it owns) may be
considered a mutual fund firm or similar. That creates possible unfavorable tax consequences and other paperwork shuffling with the SEC to be done.
With a Lycos or AltaVista generating substantial revenue as the core operating asset absorbed into CMGI, however, that may put CMGI in line with
being an operating company (according to the 40's Act). I believe the law is out of date and needs modifying (it's been 50 years and more than 50 years
in Internet time). But regardless the Act is there and the SEC has no motivation to change it whatsoever.
A side note but an important one behind CMGI's moves here and one I want you to understand since nobody else has mentioned this.
Overall the benefits to CMGI are clear to me and pro forma I think it may create a much more valuable entity that's able to deploy CMGI's portfolio
and current operating firms in its fold.
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